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Flash Note YTD 2018 : Groupama Cash Equivalent

09/10/2018

Since the beginning of the year 2018, the performance of the fund (share class I-C EUR FR0012599645, from 29/12/2017 to 01/10/2018), is down 0.11%, compared to a fall of 0.28% for its benchmark index, the Eonia capitalised.

Performance

Since the beginning of the year 2018, the performance of the fund (share class I-C EUR FR0012599645, from 29/12/2017 to 01/10/2018), is down 0.11%, compared to a fall of 0.28% for its benchmark index, the Eonia capitalised.

Since the beginning of the year and over the recommended investment period (6 months) or even beyond (1 year, see graph below), the fund has fulfilled its mandate by outperforming the money-market funds. This outperformance was achieved with a low volatility (0.11% over 1 year), which is fully in line with the prudent positioning of the strategy.

Over 3 years, the fund (part IC- EUR: FR0012599645) has achieved a performance of 0.36%, compared to -0,99% for the Eonia compounded index (on 1 October 2018).

Since its launch on 23 March 2015, the fund (part IC-EUR: FR0012599645) has achieved a performance of 0.29%, compared to -1,05% for the Eonia capitalised (on 1 October 2018).

Market Context in 2018

The year 2018 marks a turning point in the markets, with the shift of monetary policies towards a less accommodative approach. Consequently, for the first time in several years, the trend of credit premiums is towards a widening spread, on both the fixed-income and money market universes.

Bloomberg, date 26 September 2018 * bps: basis points (1 bp = 0.01%)

Source: Bloomberg, date 28 September 2018

This movement is global. It can be observed on both money-market and bonds instruments with maturities from 1 month to 3 years. Nevertheless, up to now, the ECB has managed to limit the increase in interest rates by renewing and reinforcing its “Forward Guidance”, i.e. by transparently announcing its intentions concerning its future monetary policy.

A prudent strategy SUITED to a context of normalization of the monetary policy

Overall positioning

This market configuration has prompted us to remain prudent all through the year with regard to both interest rate and credit risks. As of 27 September:

The credit sensitivity (WAL*) also reflects our prudent approach, standing at 360 days. This is still far from its upper limit (authorized range: 0 to 540 days).

Country positioning

Source: Bloomberg, on 1 October 2018.

During the first few months of the year, we have adopted a Long Spain and Portugal, and a Short on Italy. We are still expecting a return of the Iberian Peninsula to the semi-core area, whereas Italy remains entangled in political difficulties. This strategy has been beneficial for the performance of the fund.

While we have a fundamentally negative view of the political developments in Italy, we have been able to exploit the volatility generated by the Italian political crisis since last May, by taking tactical directional positions on Italian sovereign debt. These exposures are calibrated to meet our low volatility target.

We are currently over-hedged on Italian risk via the 3-year interest rate Futures (including sovereign and private debts). We have judged that the disagreements between the Italian Finance Minister on the one hand and the two heads of the parties in the ruling coalition, the 5-Star Movement and the League (Di Maio and Salvini respectively) on the other, would penalise the Italian debt. The coming key dates (approval of the budget by the European Union and the review of the country’s credit rating by Agencies in October) are expected to put additional pressure on the country’s debt.

Please note that our exposure to Italian credit is relatively low (7%) and is concentrated on short-term maturities, in particular in financial instruments:

Data on 30 September 2018. Source: Groupama Asset Management

Concerning the Brexit negotiations, the uncertain outcome also prompts us to remain prudent: our exposure to British credit issuers stands at 2.3% (including 0.8% in the banking sector, as of 26 September 2018).

Curve positioning

Our main scenario argues for cautiousness. We prefer short maturities (less than 12 months), which are less sensitive to a rise in rates and a widening spread in credit premiums.

In this segment, we prefer money-market instruments to fixed-income instruments, because we consider bonds to be more sensitive to the termination of the ECB’s asset purchase programme. Nevertheless, we continue to participate in the primary market when we consider that the premiums offered have a high spread-tightening potential. Evidently, we remain extremely attentive to the quality of the selected signatures.

Sector positioning

We are shying away from the automotive sector, which is having difficulty distancing itself from the scandals of the cheating on environmental standards: we are not adding new automotive instruments in the portfolio.

Perspectives

After announcing the end of its asset purchases and the beginning of interest rate hikes for the second half-year of 2019, the ECB could reinforce its communication towards the policy it intends to implement on its debt stock and TLTROs (targeted long-term refinancing operations). This is because the growth and inflation dynamics are expected to remain favourable, enabling the ECB to adopt a less accommodative position, albeit without becoming restrictive.

Prudence remains the order of the day, while we await further details, and our opinion is that the observed narrowing of premiums over the last few years, due to the measures taken by the ECB, will logically be inverted.

Our defensive positioning on investment-grade and short-term credit, with extremely low sensitivity to interest rates, seems appropriate to this difficult environment. We anticipate an increase in volatility to more normal levels, opening new opportunities for our active management to generate value.

As a reminder, the main risks associated with the fund are interest rate risk, credit risk, liquidity risk, capital loss risk and derivative instrument risk.

* WAM (Weighted Average Maturity): the weighted average maturity corresponds to the interest rate sensitivity, expressed in days ; WAL (Weighted Average Life): the weighted average life corresponds to the credit sensitivity, expressed in days

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Past performance is not a reliable indicator of future performance

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